Warsh Sees Risk to Market-Set Prices in Fed Bond Buys

Federal Reserve Board Governor Kevin Warsh said that the U.S. central bank’s plan to buy $600 billion of Treasury securities must be monitored for the risk it poses to disrupting market-set price-making.

“The Fed’s increased presence in the market for long-term Treasury securities poses nontrivial risks that bear watching,” Warsh said in an opinion piece in the Wall Street Journal. “As the Fed’s balance sheet expands, it becomes more of a price maker than a price taker,” and if investors doubt the values set for the securities, “risk premiums across asset classes” could shift unexpectedly around the world, he wrote.

Warsh’s comments come as nations from Germany to Brazil highlight dangers in the Fed’s strategy, including the creation of liquidity that flows to emerging markets and causes asset- price bubbles. The Fed board member said “additional monetary policy measures are poor substitutes for more powerful pro- growth policies,” and urged tax changes to spark private investment and regulatory changes to promote competition.

“The Fed can lose its hard-earned credibility -- and monetary policy can lose its considerable sway -- if its policies overpromise or under deliver,” wrote Warsh, 40, who was appointed by former President George W. Bush and previously worked at Morgan Stanley before joining the Fed board. Warsh’s opinion piece was published on the Wall Street Journal’s website today.

Falling Yields

Yields on benchmark 10-year Treasury notes have fallen since the Fed’s commitment, to 2.52 percent as of 2:53 p.m. in Tokyo from 2.59 percent the day before the central bank’s announcement.

Warsh voted for the Federal Open Market Committee’s Nov. 3 decision to buy more U.S. government bonds, a move repeatedly defended by Fed Chairman Ben S. Bernanke in recent days.

“Our purpose is to provide additional stimulus to help the economy recover and to avoid potentially additional disinflation which I think we all agree would be a worse outcome,” Bernanke said at a conference in Jekyll Island, Georgia, two days ago.

Federal Reserve Board Governor Kevin Warsh said that the U.S. central bank s plan to buy $600 billion of Treasury securities must be monitored for the risk it poses to disrupting market-set price-making.
The Fed s increased presence in the market for long-term Treasury...